As Eugene Volokh notes, this issue was at the center of Sony in 1984, “which rejected a copyright claim against VCR manufacturers.” It was also at the center of Grokster, Aimster, Napster, Limewire, and now Viacom v. YouTube.

The defendants operated a business called Qchex, which allowed owners of bank accounts to prepare and send checks via Internet. But, said the court:

The Qchex system was highly vulnerable to con artists and fraudsters. Because the information necessary to set up an account was relatively public and easy to come by, it was a simple matter for unscrupulous opportunists to obtain identity information and draw checks from accounts that were not their own. Indeed, over a six-year period, Qchex froze over 13,750 accounts for fraud. Those accounts spawned nearly 155,000 checks, supplied over 37,350 bank account numbers, and were the source of checks totaling more than $402,750,000—an amount more than half of the total drawn during that time.

The FTC won, in an opinion that will be cited often in connection with various present and future Internet thefts and scams, including those concerning intellectual property – RTWT . Example:

Qchex’s challenge . . . ignores the fact that Qchex created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate. Qchex’s approach would immunize a website operator that turned a blind eye to fraudulent business made possible only through the operator’s software.

The court also noted (pp. 13-14) that Qchex offered no real consumer benefit – many providers are working assiduously to expand the electronic payments system, and the ready availability of such mechanisms destroyed any claim that Qchex was necessary to provide consumers with a legitimate service. P2P providers will see this point made again, since the owners of creative works are assiduously working to make them available legitimately. The “consumers ought to be able to steal them” argument is unlikely to get much judicial traction.

As a sidelight, note that the case helps the growing digital currency movement being promoted by Visa, American Express, PayPal, the banks and others – rock solid integrity is a vital component of such a system.

[…] discuss the relevance of the statutory protection for Internet services found in 47 U.S.C. § 230. Digital Society has a brief discussion of the decision. Ars Technica has two posts from 2009 (February and […]

# 29 May 2010 at 3:06 PM

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